Ministers have ordered an urgent review into a key lending rate between banks after it was found to have been rigged by traders.

The independent review will look at the future operation of the Libor rate and consider whether criminal sanctions should be introduced, a Treasury source said.

It comes after Barclays was fined a record £290million for its part in rigging the lending rate, which affects millions of homeowners and borrowers.

Barclays chief executive Bob Diamond has been summoned to appear before the Treasury Select Committee next Wednesday.

His appearance comes alongside revelations that Barclays compliance department failed to act on three separate warnings about conflicts of interest and ‘patently false’ submissions by its staff.

Following an extraordinary week of scandal and disgrace, senior politicians and church leaders have called for a financial equivalent of Lord Leveson’s Press inquiry.

The ‘shoddy and deceitful’ behaviour of banks should be probed at a public inquiry, David Cameron was told.

Labour leader Ed Miliband wants the Prime Minister to set up a judicial investigation into the banking world that would lead to a standards board and code of conduct.

The Committee will question Mr Diamond about the penalties levied against Barclays by authorities in the UK and the US following an investigation into the submission of various interbank offered rates.

Revelations that traders conspired for years to rig key interest rates have created a widespread feeling that only a truth and reconciliation inquiry can restore trust in an industry vital for economic recovery.

Today it emerged that Barclays’ compliance department failed to act on three separate internal warnings about conflicts of interest, according to the Financial Times.

Issued between 2007 and 2008, the bank failed to act on ‘patently false’ submissions by its staff to the panel that sets the benchmark interest rate used to price mortgages and credit card loans worldwide.

Time for action: Labour leader Ed Miliband, left, has called on Prime Minister David Cameron, right, to set up a judicial investigation into the banking world

The failings – revealed in the bank’s £290m settlement with US and UK regulators this week for trying to manipulate a key bank interest rate that influences the cost of loans and mortgages – have angered the industry.

An executive at a rival bank told the newspaper that he ‘could not get his head around the fact’ three warnings had gone ignored.

Yesterday Barclays, HSBC, Lloyds and Royal Bank of Scotland were censured for selling risky and inappropriate insurance to thousands of small firms.

The Financial Services Authority said the big four missold hard-to-understand interest rate swaps to thousands of businesses, leading some of them to go bust.

Business Secretary Vince Cable admitted that the banking sector is a ‘massive cesspit’ that needs clearing up.

Time for action: Barclays PLC President Bob Diamond has ‘questions to answer’ according to Prime Minister David Cameron

The Barclays chief executive is facing growing pressure to resign after it emerged that his staff made millions by fixing the interbank lending rate Libor.

Asked whether Mr Diamond, who earned £18million last year, was the right man to lead Barclays, the Prime Minister replied: ‘I can’t say that. He has questions to answer.’

Labour leader Ed Miliband accused the Government of adopting ‘sticking-plaster solutions’ and criticised the Prime Minister as being ‘out of touch’.

‘I have news for David Cameron: the people of this country want a moment of reckoning for our banks,’ he told a Fabian Society conference in London.

‘The British people will not tolerate the establishment closing ranks saying we don’t need an inquiry.’

‘They want a light shone into every dark corner of our banking system. They want bankers held to account. They want the system rebuilt.’

The Committee will also ask non-executives, including Chairman Marcus Agius, to appear before the Committee on Thursday 5 July.

Commenting on the evidence sessions, the Chairman of the Treasury Select Committee, Andrew Tyrie MP, said:

‘It appears that many banks were involved and Barclays were the first to own up. This is the most damaging scam I can recall.

‘The reputation of Britain’s financial services industry has been severely tarnished, albeit unfairly for the overwhelming majority unconnected with the scam.

‘The public’s trust in banks has been even further eroded.

‘Restoring the reputational damage must begin immediately.

He added: ‘Parliament and the public need to know what went wrong and whether the perpetrators have been rooted out. We also need to be given confidence that this has been put right.’

Bank of England Governor Sir Mervyn King admitted ‘something went very wrong’ in the finance industry, criticising ‘excessive’ salaries and bonuses, ‘shoddy’ treatment of customers and ‘deceitful’ manipulation.

U.S. TO DEMAND BARCLAYS BANK TRADERS EXTRADITED ON CRIMINAL CHARGES

Up to 15 staff in the Barclays UK offices have been disciplined or sacked due to the crisis interest rate rigging scandal.

But now it has been revealed that six UK Barclay traders could be extradited to the US to face criminal charges over the saga which has seen billions wiped off the bank’s value.

Investigators in the US have narrowed down six employees they believe could be brought before their court, reported the Daily Mirror.

The bank – which was fined £290million by UK and American authorities for cheating customers – has signed a non-prosecution agreement with the US Department of Justice.

However the deal does not stop individual staff from being investigated and charged.

Last night the US regulator Commodity Futures Trading Commission confirmed it was investigating to the newspaper, but declined to comment on individuals under scrutiny.

But government sources suggested Bank officials and members of the last Government had questions to answer about whether they were aware of attempts to depress the Libor rate at the height of the financial crisis in 2008 and 2009.

There was concern ‘among all the authorities’ that if the rate rose too high, banks might be pushed into greater crisis, tipping the economy back into recession, one source said.

Evidence that government or bank officials discussed pushing the rate down with bank bosses would take the scandal to new heights.

Justice Secretary Ken Clarke insisted today that bankers who have committed crimes must be brought to trial.

Asked about the two major scandals that have rocked the City this week, Mr Clarke acknowledged that financial crime was ‘easier to get away with’ than virtually any other misdemeanours.

But he said there should be criminal investigations and prosecutions where crimes have been committed.

‘We are very bad at prosecuting financial crime in this country,’ he told the BBC Radio 4 Today programme.

‘I suspect financial crime is easier to get away with in this country than practically any other sort of crime.

Mr Clarke said some of the behaviour which came to light this week was ‘shocking.’

Former Archbishop of Canterbury Lord Carey, writing in today’s Daily Mail, warns that widespread alienation against banking giants risks leading to civil unrest.

‘Repentance implies a complete turning around and making good. As things stand, the banks have failed to demonstrate any sort of repentance,’ he says.

‘Why hasn’t there been an investigation into the banks, the regulators and the political culture which allowed banking abuses to flourish? What is needed now is a determination to open up the banking industry to a proper public inquiry.’

Unimpressed: Bankers who have committed crimes must be brought to trial, Justice Secretary Ken Clarke, right, insisted today, while Business Secretary Vince Cable, left, has admitted that the banking sector is a ‘massive cesspit’ that needs clearing up

Mr Miliband said: ‘We definitely need an inquiry into the culture and practices of the industry.

‘What’s been revealed with Barclays is a set of practices which have appalled people across the country and we’ve got to make sure we shine a light in all the corners of the industry to find out why these practices have been going on and what it is about the culture that has enabled this to happen.

‘It’s pretty clear the change that is required at Barclays. I think it’s very hard to see that being led by Bob Diamond.’

The Labour leader argues that while most people in the City are honest and hardworking, a minority appears to be in the grip of ‘institutionalised corruption’.

Unimpressed: Governor of the Bank of England, Mervyn King has admitted ‘something has gone very wrong’ in the finance sector

As well as drawing up plans for a professional standards body and code of conduct, he said the inquiry should examine unregulated areas of the finance industry.

Mr Cameron said: ‘People are rightly angry about the behaviour of the banks and so am I. People want to see real accountability for what has happened. When people have broken the rules they should face the consequences.’

Chris Leslie, a Labour Treasury spokesman, said: ‘We need to know how many employees were complicit in this process, how many will be losing their jobs as a result, and whether this needs to now go beyond the regulators and into a criminal investigation.’

He told BBC Breakfast: ‘I think the public certainly want an investigation that is independent of the banking sector itself to look into the practices that have been going on for many years.

‘The Treasury Select Committee of the House of Commons is going to get Bob Diamond before them and I’m sure he’s going to get a good grilling.

‘But what we really need is something like the Leveson Inquiry – not for such a long period of time – interviewing all the top bankers, all the chief executives of the major banks, but also getting some of the people from the trading floors giving evidence on oath.’

Lord Adair Turner, chairman of the Financial Services Authority, the City watchdog, said the fixing of the crucial Libor interest rate showed ‘a degree of cynicism and greed that is shocking’.

Former Conservative shadow home secretary David Davis said: ‘I have no doubt that we have need for a proper inquiry.

‘It has got to have proper investigative powers – all the things that Lord Leveson’s inquiry has in terms of rights to access papers and hear evidence on oath – but it will also probably need to work with specialist City police.’

Former Tory Chancellor Lord Lamont said the revelations of what had gone on at Britain’s banks were ‘deeply shocking and deeply damaging to capitalism, free enterprise and the reputation of the City’. ‘There certainly needs to be an inquiry into what went wrong at the banks,’ he added.

Next week, the Treasury is expected to set out more details of plans for criminal sanctions for erring bank bosses.

Downing Street sources said a public inquiry ‘was not being ruled out’.